Sunday, January 13, 2002
Regulatory costs higher for small businesses
By Wayne Tompkins
The Courier Journal
LOUISVILLE — What small-business owners like Jim McCubbin have long suspected, a recent study has quantified: Small businesses are bearing a greater share of federal regulatory costs per employee than much larger companies.
Mr. McCubbin, president of Rebco Inc. in Louisville, said some quick math illustrates the problem that the U.S. Small Business Administration study has identified.
A company safety coordinator, who requires several hours of training to learn and update the regulations his or her employer must follow, is going to be used much more efficiently at a larger company, Mr. McCubbin said.
“For a big company, this person is probably going to train several employees at several plants,” said Mr. McCubbin, whose company makes packaging materials. “At my company, they're training 15 employees. So it costs us more per employee, there's no question.”
The study, “The Impact of Regulatory Costs on Small Firms,” found that federal regulations cost companies with fewer than 20 employees nearly $7,000 per employee in 2000. Those same regulations cost mid-sized firms about $4,300 per year per employee and large firms (more than 500 employees) $4,500.
“Costs per employee thus appear to be 55 (percent) to 60 percent higher in small firms than in medium-size and large firms,” wrote co-authors W. Mark Crain and Thomas D. Hopkins, who did the research for the SBA's Office of Advocacy. “Perhaps our most important finding is that small businesses bear a disproportionately large share of the federal regulatory burden.”
That burden takes many forms, including regulations on labor standards, employee benefits, occupational safety and health, civil rights, tax compliance and environmental matters.
The report said Americans spent $843 billion in 2000 to comply with federal regulations, or about $8,200 per household. That's in addition to $19,600 per household in direct or indirect payments to the federal government.
The entire report is available at www.sba.gov/advo/research/rs207tot.pdf.
Small firms in the manufacturing sector were hit especially hard, with the costs of environmental and tax-related paperwork the biggest culprits, the study found.
But small businesses do get a break in some instances. For example, the per-employee cost of economic regulations — a category that includes international trade restrictions — falls most heavily on large companies.
And small businesses are exempt from many federal regulations, including the Family and Medical Leave Act, which doesn't kick in until a business hires its 50th employee.
Cost of being small
& Tom Underwood, president of the Kentucky Chapter of the National Federation of Independent Business, said the disparity is inevitable because of the way the regulatory burden is structured.
“The problem is not so much the cost of the actual regulations itself. It's the administration and keeping up with it,” Mr. Underwood said. A large corporation, for example, “might have a whole department which is the compliance department.”
Small businesses don't have that ability, and their harried owners are tending to hundreds of tasks simultaneously and lack the time to study regulations that can run into several hundred pages of manuals.
“You've got Joe Schlump's Lumberyard — Joe usually finds out about these regulations about the time Joe comes to work and the regulator comes to the office and fines him,” Mr. Underwood said. “And the agencies don't have the requirement to notify Joe of the changes in regulations. The presumption is it's Joe's responsibility to keep up with them.”
The study itself makes no recommendations on equalizing the regulatory cost burden, saying it “should be seen as a building block toward a more adequate understanding of regulation.” It advises that a similar study looking at benefits of regulation “would be a logical next step toward achieving a more rational regulatory system.”
That hasn't stopped the flow of ideas from small-business owners and their advocates on what might be done.
Theresa Cox, office manager for Jellico Chemical Co. in Louisville, said something needs to be done to train small businesses on regulations once they're placed into force.
“I think that with any of these government regulations, they also should have people who can train. A lot of times, it's just, "Here's the 500-page book, comply with it in two months.' There's no training you can take in order to comply.”
Even when training is available, she said, “it's out of town and you have one or two people off work for three or four days. You have hotel bills, you have meals. It gets unreal for small businesses.”
Ms. Cox said training cooperatives, where several small businesses working with governments can band together to hire a trainer for sessions on a particular regulation, is an option worth exploring.
She also said governments should explore the concept of structuring regulatory costs like insurance premiums, where the worst and the highest-risk violators carry more burden.
A litany of complaints
Ideas like Ms. Cox's are being discussed by groups being formed at the federal and state levels. The SBA's Office of Advocacy, for which the study was done, was itself created as an ombudsman between small business and government regulators.
Rep. Anne Northup, R-Ky., said the study confirmed complaints she's heard from many small-business constituents.
“It's not what one person tells you or two people tell you, but when the 200th person tells you the same thing — people who don't know each other or have any business relationship, all are giving me the same message.”
Ms. Northup said she agreed with many small-business owners that regulators should take a proactive rather than reactive approach to enforcement. In other words, work with companies to help them comply with the regulations, rather than simply showing up and assessing fines.
Mr. Underwood sees two approaches. “The regulatory agencies themselves need to recognize the difference between massive business versus Joe's small lumberyard when they are writing these regulations,” he said.
Mr. Underwood said there also are opportunities available under Kentucky law for tiering — tailoring the regulations to different-sized businesses in different situations.
“It's rarely exercised, though. It's easier just to write one regulation and throw it out there,” he said.
Small-business owners, while supporting the intent of most regulations, say the broader answer lies in what Mr. McCubbin calls a more common-sense approach, including the streamlining and elimination of rules “so blatantly nonsensical that it's impossible” for an employer to comply.
“I think one thing that would help greatly is if our government would just have a little more faith in us,” Mr. McCubbin said. “There really is no need for someone to come in here and tell me how to be safe. Even if we didn't care that our friends are getting hurt, it costs us money. There's a huge motivation for us to be safe.”
Regulatory costs higher for small businesses
